“Offense sells tickets, defense wins games…”
Capital markets around the world have reacted sharply to the potential economic consequences of the spreading coronavirus.
Stock prices have traded sharply lower over the last couple of weeks, and prices for the safest government bonds have shot higher, reflecting the fear premium building in markets.
As I stated yesterday – and having lived through several waves of market panic since getting into the capital markets game in 1994 – the last thing an investor should do is react rashly.
This is the time to stay calm and keep an eye open for opportunities.
Now, selling stocks and buying bonds is a typical defensive reaction – but it’s one that takes you out of the game.
And the risk of leaving the game is that your portfolio ends up at a permanently lower level.
By the time you step back in, the market has recovered and you find yourself buying high after you sold low in a defensive panic.
Playing Defense With Cannabis Stocks
Instead of sitting on the sidelines, you find stocks with surging revenues and strong balance sheets all trading at great values.
And when looking for great defensive stocks that will give you the most bang for your buck when stock markets start to recover, you need to look no further than the fastest-growing industry in the world.
Yes, I mean cannabis.
And to understand what I mean by high growth, consider this.
Legal revenues in 2019 in the United States jumped at least 35% from the prior year. And this year’s sales growth could double that again.
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The top operators in the space, like many U.S. multi-state operators (MSOs), will grow sales at 80% to 100% per year.
These companies are all opening dispensaries in key states with massive growth opportunities. Sales are leaping ahead and the management teams of these companies are navigating this growth with an eye on profitability.
Despite how the market is currently treating their stocks, the potential for eye-popping returns builds with every passing higher-revenue day.
And while global supply chains grind to a halt, cannabis sales are not dependent on China.
Vertical multi-state operations are vertical within the same state. That’s a lot of redundancy forced upon cannabis companies, but that redundancy has the advantage of totally self-contained operations.
Weathering the Storm
Finally, despite challenging capital conditions for some cannabis companies, many are in an excellent position to weather the storm. Some have secured valuable lines of credit, while others have been in cash conservation mode for months.
In fact, many cannabis companies are exceptionally well-capitalized. And these companies are doing exactly what I advise you do in times like this – look for opportunities.
But since the market could be skittish for some time, patience will be a key part of our defense.
For the same reason you don’t want to panic sell, you also don’t want to panic buy.
We’re going to be selective where we pick our spots. There’s no use in stubbornly fighting the tape and getting continuously stopped out.
Investing can look a lot like waiting – and I want you to wait for the best opportunities to buy.
Ultimately, the actual impact of the coronavirus on economic growth will be much less than the market expects. Which means the chances of permanent damage to most companies is low.
So, avoid permanently damaging your portfolio by selling alongside everyone else. It’s a lousy defense.
Instead, we’ll pick our spots and be there for the inevitable turn.
Don Yocham, CFA
Executive Director, National Institute for Cannabis Investors
14 responses to “Why Cannabis Stocks Are the Best Defensive Stocks”
March 10 2020